Under Canadian bankruptcy law, your right to sue someone for financial damages generally vests in your Licensed Insolvency Trustee (LIT). You must disclose any pending civil lawsuits, and the LIT will decide whether to continue the claim to pay your creditors.
Filing for bankruptcy in Canada provides a fresh financial start, but it also means surrendering control of certain assets to your bankruptcy estate. 📍 If you are currently involved in a civil lawsuit, or plan to sue someone, you might be wondering who gets to keep the settlement money. Generally, the Bankruptcy and Insolvency Act (BIA) dictates that any financial compensation you are owed becomes the property of your estate.
Understanding how litigation works during insolvency is crucial, whether you live in Ontario, Alberta, or British Columbia. Navigating the intersection of civil litigation and bankruptcy can be highly complex. We always recommend consulting with a local civil litigation lawyer from our directory to understand how your specific claim is treated under federal and provincial laws.
Step-by-Step Process for Managing Lawsuits During Bankruptcy in Canada
The rules governing lawsuits during bankruptcy apply federally across Canada. 📝 Whether your case is heard in the Superior Court of Justice in Ontario or the Court of King’s Bench in Alberta, the process of handling the lawsuit during bankruptcy generally follows these mandatory steps.
Step 1: Disclosing the Lawsuit to Your LIT
Honesty is the most critical requirement during any bankruptcy proceeding. When you file for bankruptcy, you must disclose all assets, including any contingent assets like a pending lawsuit or a right to sue. Failing to inform your Licensed Insolvency Trustee about a lawsuit is a serious offence under the BIA and can jeopardize your discharge.
Step 2: Assessing the Nature of Your Legal Claim
Not all lawsuits are treated equally under Canadian law. ⚖ If you are suing for financial loss, such as wrongful dismissal, breach of contract, or property damage, the right to that lawsuit completely transfers (vests) to your LIT. However, if your lawsuit is strictly for personal pain and suffering (like a specific personal injury claim), those damages typically do not vest in the trustee and remain yours.
Step 3: The Trustee Decides the Next Course of Action
Once the LIT takes ownership of a financial claim, they have the authority to decide how to proceed. The trustee may choose to continue the lawsuit by hiring a litigation lawyer, settle the claim out of court for a guaranteed sum, or abandon the lawsuit entirely if they believe the legal costs outweigh the potential benefits to your creditors.
Step 4: Distribution of the Settlement Funds
If the lawsuit is successful or a settlement is reached, the defendant will make the settlement cheque payable to your bankruptcy estate. 💰 The LIT will deposit these funds into a trust account and use them to pay the administrative costs of the bankruptcy, followed by a pro-rata distribution to your unsecured creditors. Any surplus leftover after all creditors are paid in full would theoretically be returned to you.
How Much Does it Cost to Litigate While Bankrupt in Canada?
Funding a lawsuit while bankrupt is uniquely challenging because you do not control the financial outcome. Here is a breakdown of potential costs and fee structures involved in litigating an active claim during an insolvency proceeding.
- Court Filing Fees: Initiating a Statement of Claim typically costs between $200 and $400 CAD, depending on your province.
- Litigation Lawyer Fees: Many lawyers work on a contingency fee basis (often 25% to 33% of the settlement), meaning they only get paid if the estate wins the case.
- LIT Administrative Fees: The trustee will take a legally regulated tariff from the settlement proceeds to cover the administration of your bankruptcy estate.
- Security for Costs: In some provinces, defendants can ask the court to order the bankrupt estate to post security for costs before the lawsuit can proceed.
How Long Does the Process Take?
Civil lawsuits in Canada are notoriously lengthy, and involving a bankruptcy estate can add an extra layer of administrative delay. ⌛ A standard civil lawsuit in provincial courts can take anywhere from two to five years to reach a trial or settlement. Because the LIT must remain involved until the lawsuit is resolved, your official discharge from bankruptcy might be significantly delayed.
Frequently Asked Questions (FAQ)
Do I get to keep personal injury settlement money while bankrupt?
Generally, compensation strictly awarded for personal pain and suffering does not vest in the trustee. However, any portion of the settlement awarded for lost income or special financial damages must usually be surrendered to the bankruptcy estate.
Can I start a new lawsuit after filing for bankruptcy?
If the event that caused the financial loss occurred before you filed for bankruptcy, the right to sue still belongs to the trustee. You cannot simply wait to file the lawsuit until after your bankruptcy to keep the money.
What happens if the trustee refuses to pursue my lawsuit?
If the LIT abandons the claim because it is too risky or expensive, the rights to the lawsuit may be returned to you. In this scenario, you might be permitted to pursue the claim yourself, but you should consult a lawyer to confirm your legal standing.
Can I hire my own lawyer to fight the case?
Once a financial claim vests in the LIT, the trustee is the official plaintiff. The trustee must approve the hiring of any law firm and will direct the legal strategy on behalf of your creditors.
Does this apply to the Civil Code of Quebec?
Yes. While Quebec uses the Civil Code rather than Common Law, bankruptcy is governed by the federal Bankruptcy and Insolvency Act. The rules regarding the vesting of financial claims in the trustee apply equally in Quebec.
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